Building also is picking up. After falling in March to its lowest level in more than five years, construction by state and local governments rose 2.3 percent to a seasonally-adjusted annual rate of $252 billion in November, figures from the Commerce Department in Washington show.

The country’s third most-populous state, New York, may break ground this year on a $3.14 billion new bridge to replace the 57-year-old Tappan Zee crossing over the Hudson River. The city government in Oxford, Mississippi, is building a new firehouse, expanding tennis courts and giving its employees a 3 percent raise, Mayor George Patterson said.

“We kept our heads down for a few years, but this year we feel like we’re turning the corner,” he said.

That’s not to say states and municipalities are trouble- free. While they’ve come through the worst of the crisis, they still face longer-term financial challenges, including rising costs for the Medicaid health-care program and underfunded pension plans, Boyd said.

Reduced Aid

He cited another big danger: the likelihood that the federal government will reduce its aid to the states as it seeks to rein in a budget deficit that has topped $1 trillion in each of the past four years. States get about one-third of their revenues from Washington.

The agreement Congress hammered out to avoid more than $600 billion in automatic spending reductions and tax increases --the so-called fiscal cliff -- spared states from cutbacks, at least for now. Under the pact, the decrease in expenditures was put off until March.

The reductions would have cost states $7.5 billion for education, health-care and community-development programs, according to Federal Funds Information for States, a budget- tracking service created by the National Conference of State Legislatures, based in Denver, and the National Governors Association in Washington.

While that’s a small share of the approximately $519 billion that states received in aid last year, Boyd said further cuts are likely.

That means local governments may get less help from the states, Diffley said.